The 2013 Crush Report and Cabernet Sauvignon

I guess the big news about the 2013 California Crush Report, just out, is that we set another record for tonnage.

It was headline news in 2012 when California’s crush was the biggest ever, but for some reason, news of 2013’s even bigger one has been largely muted. The total was 4,685,075 tons, up 7 percent over 2012. Yet the devil is in the details. The state Dept. of Food and Agriculture counts table grapes and raisins in the total, and 2013’s raisin crop also was large. Separating table grapes and raisins out, we still had the biggest red wine crush ever. Red wines were up 5 percent; white wines were up 6 percent. But the average price for all varieties was down, by 4 percent, from 2012: $706 per ton, on average, for reds, $620 for whites.

Cabernet Sauvignon was among those red varieties whose price dropped from 2012 to 2013. Not by much: only 3.6%, but still. Why did Cabernet drop? I suspect that number was skewed downward by the cost of Central Valley grapes. For instance, the average price per ton of Cabernet in Districts 11, 12, 13 and 14 (San Joaquin, Stanislaus, Madera, Fresno, Tulare, and down into Kings and Kern counties) was down everywhere except in District 14, where it crawled up a tiny $19 a ton, whoopee. But if you look at District 4, Napa Valley, the average cost per ton of Cabernet grapes soared, from $5,058 in 2012 to a whopping $5,494, an increase of 8.6%. (The highest deal reported to the state last year was $35,000 per ton, in Napa Valley. The Crush Report doesn’t identify where those grapes were from. If you know, send me the answer on the back of a million-dollar bill, and thanks to Click and Clack for that.)

Surely we can draw conclusions. Everyday Cabernet is under intense price competition in the marketplace. Producers simply can’t raise their prices too high, or else someone will undercut them. And if you’re a supermarket wine, you can’t afford to let somebody undercut you; that is death by a thousand cuts.

But Napa Cabernet appears to have rebounded after the hit it took in the Great Recession. I certainly see this anecdotally; in my own experience, I’m getting more expensive Napa Cabs for review than ever, many of them from first-time producers. I never thought that some of these businessmen-turned-vintners who buy lifestyles in Napa Valley (and elsewhere) are the smartest marketers in the world; but they must know something, to think that consumers are ready for yet another $80 or $100 Cabernet.

So there’s increased competition for what is, after all, a limited supply of Napa Valley Cabernet fruit. This must be good news for those esteemed vineyards–Stagecoach, Beckstoffer Tokalon, Dr. Crane, Georges III and others–that sell to the highest bidders, as well as for estate-bottled Cabs, whose owners feel they can notch prices upward as demand ticks back up again.

Cabernet is a funny wine. It’s been at the top for so long that people wonder when its run finally will end–kind of the way Bob Hope and Frank Sinatra hung on forever (or Paul McCartney and Mick Jagger, for that matter). Surely a new face has to take its place. But Cabernet is a grape and wine, not subject to the mortal coils. It keeps on keeping on, and I think smart producers understand this. Far from abandoning it, they’re seeking new ways to brand it–new price points, new points of reference, new strategies for messaging. And Cabernet is elastic enough to cooperate with them all. It’s really a miracle variety: having achieved superstardom, it’s undoubtedly the best-known red wine in America. The name means class and refinement, even to the least-knowledgeable novice, while the miracle is that upscale consumers haven’t lost their faith in it merely because the hoi polloi also likes it. It might have gone that way–like the kids who are abandoning Facebook because old people have taken it over. Facebook is proving not to be sharable across multiple demographics. But Cabernet continues to appeal to everyone, and for that, you have to give credit for some underlying nobility that Cabernet possesses. What more could a varietal ask for?

“I never thought that some of these businessmen-turned-vintners who buy lifestyles in Napa Valley (and elsewhere) are the smartest marketers in the world; but they must know something, to think that consumers are ready for yet another $80 or $100 Cabernet.”

. . . when you’ve bought land at the top of the real estate market (pre-2007 financial markets crash), your newly-planted vines are now coming online, you have designed and built a “temple to wine” (fermentation facility, expensive French oak barrel aging facility), and have hired expensive vineyard manager and winemaker consultants, you quickly find that your “business model” requires you to sell Cabernets at upper two digit and low triple digit suggested retail selling prices in order to “break even.”

Or: that’s what your established neighbor sells his/her wine for, and you think your wine is every bit as good … and should command the same/similar price in the marketplace.

In this era of off-vintage red Bordeaux (2011 and 2012 and 2013), California vintners would do well to moderate their pricing, and recapture market share from the French.

There may be more and more people producing these wines (and subsequently driving up grape and land prices) as more and more of the 1% decide to buy into the Napa lifestyle. It, however, is a leap of faith to extrapolate from these trends are, in any way, being driven by increasing demand for these wines. If anything, I’ve seen the market swing against these wines not only intensify in those markets where it began (Chicago, NYC, DC, Boston and to a lesser degree SF) but broaden outwards into secondary markets such as Ohio, Minnesota, Colorado and North Carolina.

I believe that the link between what Napa produces and market demand has never been more disjointed, and I’ve seen the Napa perspective from the inside–my annus horribilus of consulting for a group of them. I’ve seen “cult” wineries with the lower cost structure that a decade or more in business brings, willing to sell less than half their production (and still be profitable at $100+ bottle) but never, never adjust prices, admit to your neighbors that you’re not selling out and constantly explain your shrinking distribution footprint as, “I don’t have enough wine to sell in those states.” This last one I always found highly amusing—as if vintner X decided to voluntarily pull out of NYC and Chicago but keep his distribution in Tennessee and Missouri. I’ve seen wine palaces on Spring Mountain built by hedge fund managers that look like the lair of a Bond Villain and could never–even in the best of market situations–recoup their cost. Profitability, however, was never a concern of these people; image was. That winery could lose money for its entire existence (and probably will), and it would be nothing more than a rounding error on this person’s balance sheet. I’ve seen Napa cult wineries with a decade of Parker 95+ point scores squirreling away back vintages in American Canyon while engaging firms to try and quietly unload it in China.

My point is that the inner dynamics of the Napa economy–how many new $100 cabs it produces, how much these people are willing to pay for grapes or land–are utterly disconnected from direction of American demand for those wines.

Bob is right. In the vast majority of cases, Napa prices are driven by the considerations of image, ego and deeply sought after “prestige” than by any cold calculations of cost of production and market demand.

After a trade tasting a decade ago in Cleveland, I sat at a table in the hotel bar and watched the winemaker for a well known winery utterly dismantle a colleague’s (an asst. winemaker that nobody has ever heard of and probably still hasn’t heard of) rationale for charging $85 (this would have been around 2003) for his new Napa Cab. He–while generously rounding costs up–went step-by-step through grape prices, custom crush and storage fees, all new French barrels, “good glass and cardboard.”

When all was said and done, he pronounced that X had “maybe $25 in the bottle but probably less than $20.”

I am a great believer in the marketplace. It, not us insiders, eventually determine the price of wine. If they can sell it, or even enough of it, at the price, and demand does not diminish because of price, then the prices are not too high.

Mr. Haydon offers anecdotal info. There may be one-hundred new three-digit Cabs up in the Napa Valley, but the I don’t see the cost of Cab grapes going down and that means that the wineries have yet to feel the impact of the consumer disinterest that Mr. Haydon keeps parading on these pages.

As for the “wealth factor” and “Bond villian palaces”, they do not by themselves explain the continuing high prices for Napa Cab grapes. We might all be better off discussing supply and demand curves rather than criticing the lifestyles of the rich and famous.

Charlie, they’re feeling it. They’re just not admitting it, and they never will…..in some cases right up until they sell. I believe that there was a source that you might take a bit more seriously than me (SVB perhaps?) that recently released a report on the number of small Napa wineries that were discreetly being put onto the market.

My point above–and I do have a bit of an economics background–is that the supply and demand curve for Napa cab grapes is dysfunctional, and this dysfunction is the direct result(at least for the time being) of it being isolated to a large degree from the demand curve for the finished product of those grapes by those factors that I mentioned above such as obscene profit margins (COGS <20%) on the percentage of wine that is sold as well as the wealth levels of many of the individuals involved allowing them to put considerations of image and prestige above the more base considerations (and pressures) of P&L that a normal business would face.

C'mon, Charlie. As long as you've been around that valley, are you really trying to tell me that you find the notion of people being willing (and easily able) to lose money on their winery rather than adjust their prices lower than those of their neighbors to be so shocking and unbelievable?

One of the things that kinda irks me is this characterization of NapaVlly folks as being dominated by the rich & famous, the dot-com millionaires, the McMansions and the “Bond villian palaces” up in the hills, selling their triple-digit $$ Cabs. I suppose if you’re a famous wine critic who has these folks fawning over your reviews and inviting you to Premier NapaVlly and such, you see a lot of this rarified atmosphere up there. Guess I’m glad I’m not a famous wine critic.
But this, to me, is not an accurate characterization of NapaVlly folks. There are a lot of folks up there (and I suspect you all actually know some of them) who are worried about paying their mortgages, putting their kids thru college, buying their next Chevrolet (not a Porsche). You don’t have to scratch the surface up there very deeply to find a lot of them. Just walk into any tasting room and start visiting w/ the person pouring in there and find out their story, or running a wine shop up in Calistoga, instead of being schmoozed by some high-falutin’ Cabernet producer up at his showcase wnry. They’re not that hard to find..guaranteed.

Steve sez:”But Cabernet continues to appeal to everyone, and for that, you have to give credit for some underlying nobility that Cabernet possesses. What more could a varietal ask for?”

I’m not buying that for one minute. I, and many in my circle of friends, have long ago blown of expensive NapaVlly Cabernet. It’s just not a world we’re interested. We get just as much enjoyment out of a good NapaVlly Ribolla, StLaurent, Refosco, Mondeuse, Syrah, Charbono. In point of fact, I’m starting to drink and try more Cabernets than I have in the last 20 yrs. And they’re priced in the middle-two digit$. And some of them even come from the NapaVlly, of all places.
Tom

Just a little more anecdotal info…working in a zinfandel tasting room in Dry Creek Valley, many visitors are incredibly pleased to find a really good, approachable wine in the $50 range. Quite a few people come after visiting Napa and being under impressed at the whole climate and price structure. While they may not be the customers you are discussing, they are joining wine clubs and spending a lot of money on zins. Mentally moving away from Napa cabs and cab in general…

. . . For those in the business, maintaining that [elite drink] image is important not only for commercial reasons but also for reasons of personal prestige. Every stage of the trade is involved in establishing the high prices, but ultimately those prices can be sustained only through the retailers and their sales efforts. The problem for the retailers is that wine — unlike luxurious hotel rooms and other hyperinflated products generally covered as business expenses — is usually paid for directly out of the consumer’s pocket. This makes for a scary business, especially toward the high end, where The Wine Advocate roams.

The truth is that even the best wines cost ONLY ABOUT $10 A BOTTLE TO PRODUCE, and they are not inherently rare. If the initial cost is tripled to allow for profits along the path of distribution, one can reasonably conclude that retail prices above $30 are based on speculation, image, and hype. . . .

[CAPITALIZATION used for emphasis. – Bob]

Excerpt from the Los Angeles Times “Food” Section
(February 4, 2010):

“Dark days for Cult Cabs;
Makers of high-end Napa Valley Cabernets are feeling the pain
of the economy as demand for their wine plummets.”

The current economy has created ominous rumblings in the market for Napa Valley wine. Demand for high-end super-premium Cabs, even so-called cult wines, has weakened considerably with the recession. Sales are stagnant, inventories are high, and direct-mail customers — a vital piece of the high-end model — are abandoning once-coveted positions on mailing lists, while those who have waited years for the opportunity to buy in are overwhelmed with offers.

And for those wineries whose flagship productions climb above 5,000 cases, the forecast is even more challenging. . . .

UNDERSCORES THESE OBSERVATIONS FROM CHARLES BANKS:

“West Coast Wineries Are Up for Sale — Quietly”

A wave of recent deals show investors see opportunities in wine, while owners see an exit strategy.

“… While small wineries can succeed by selling most of their inventory direct to consumers and large producers have muscle with wholesalers, those in the middle — annual production of 5,000 to 15,000 cases, for example — can’t get much attention from distributors unless the brand is hot.”

— AND —

“… ‘I’ve never seen more wineries for sale in California than there are today,’ [said Charles Banks, who through investment groups such as Terroir Selections purchased Santa Barbara Syrah specialist Qupé in October and Napa veteran Mayacamas Vineyards in April.] … Banks … estimates that between 30 to 50 percent of California wineries are either in financial difficulty or aren’t as profitable as they could be.”

AND SEE THIS RELATED NEWS RELEASE:

“Over the last year there have been more than $335 million in sales of vineyards, vineyard estates and plantable land in Napa and Sonoma Counties. This doesn’t even take into account confidential sales or wineries.”

The salient point I wish to make as a marketing guy (who consults for retail wine stores in Los Angeles, and is on the receiving end of a tsunami wave of “pitches” by distributors’ sales reps) is this:

“In this era of off-vintage red Bordeaux (2011 and 2012 and 2013), California vintners would do well to moderate their pricing, and recapture market share from the French.”

Not clawing back sales from the Bordeaux producers during this fallow period, and not reestablishing Napa and Sonoma’s place at the proverbial table, will be seen in hindsight as one more self-inflicted wound by our state’s wine industry.

(I have no doubt that Washington state’s Cab and Merlot producers are enthralled by this sales opportunity.)

Bob, a normal business focused on cash flow, market share and profitability would certainly react in the way you proscribe. Having consulted myself on the Napa supplier side I can tell you that much of that valley would rather be stripped naked, hung from their heels and gelded with a hot Japanese Yanagi blade from their gourmet kitchen before dropping the price of that hundred dollar cab to fifty.

For too long a “build it and he will come” Field of Dreams mindset has characterized the upper end of the Napa wine industry.

In part because no “outside discipline” (in the form of having to qualify for business loans — which require presenting a viable business plan to a disinterested “vetting” third-party) has been imposed upon the “landed gentry” when squandering their own money.

My empathy is for the scions of Napa producers, who will never be able to start vineyards or build wineries in the land of their fathers and grandfathers.

These estates have long been corporatized and wrapped up into trusts by thousand dollar an hour lawyers. There is little chance that they won’t be passed on to the next generation of self-important dillettantes to be inevitably run into the ground.

My empathy would be misplaced if it fell on “the little Lords and Ladies of Napashire.”

No, I am referring to those that Tom Hill was alluding to: “folks … who are worried about paying their mortgages, putting their kids thru college, buying their next Chevrolet (not a Porsche). … Just walk into any tasting room and start visiting w/ the person pouring in there and find out their story, or running a wine shop up in Calistoga, instead of being schmoozed by some high-falutin’ Cabernet producer up at his showcase wnry.”

BusinessWeek magazine ran a profile on the Antinori family passing down winery wealth over 26 generations:

The “landed gentry”‘s sons and daughters don’t care to become de facto farmers. That’s they’re parent’s second career / midlife crisis dream. These Napa valley absentee Millennials are the ones I refer to who won’t become second generation wine industry leaders.

I am glad to see Tom Hill’s posting to counterbalance some of the keyboard jockeys posting here who for whatever reasons want to paint Napa Cabernet producers with a one dimensional brush. I guess the impressions depend on who one associates with. Some of us are actually out there in the vineyard working on the vines (we can claim to be “outstanding in our field” in a very germane way). Driving a 10 year old car, and having only taken one modest price increase in 17 years on a low yielding mountain cab, I look at some of these posts as rather skewed by private agendas.

The writer’s claim is unproven. Bowles states: “When Napa County became an internationally recognized wine culture capital in the 1980s and ’90s, many of the vintners were successful retirees from San Francisco and Silicon Valley looking for a second career and a nice view. A generation later, their kids who grew up among the vines aren’t planning to leave.”

Bowles goes on to cite Hailey and Loren Trefethen, Chris Hall, Janet Viader, and Will Harlan.

These aren’t the scions of arrivistes who came to Napa from San Francisco and Silicon Valley in the 1980s and 1990s.

The Trefethens have multi-generational family roots in Napa.

Chris is the son of a former American ambassador whose grape-growing roots go back to Mendocino. Janet likewise comes from a diplomat family (grandfather) and distinguished academic background mother. And Will is the son of a real estate developer.

Far removed from the scions of Silicon Valley “plutocrats” who bought into the Napa Valley lifestyle, and built their “temples to wine.”

This latter group have dug no roots into Napa soil, and have no plans to follow their weekend retreat-living parents as second generation leaders.

Actually, Bob (and by your own words) they are all one generation removed from 1%ers who bought into the Napa Valley lifestyle except for the Trefethens who are two generations removed from the Kaiser Steel CEO grandfather who bought into the valley for a weekend home.

And the point of the article (unintentionally, I believe yet crystal clear nonetheless)is that they are a bunch of ridiculously self-important and pretentious dillettantes who most likely will drive their inheritances into the ground. Look at Will Harlan. He tried to make it on his own. He used his father’s connections to do a tech start up–Equipster–that was a massive, galactic failure. He then ran back to Napa to work for Daddy and make wine under his father’s umbrella.

Like I said, Napa would be much better off if it were much less expensive and able to attract a fresh generation of real talent to move it forward. If the collection of Porsche racers and elite diners in that article are whom the valley is counting on to lead it into the future, you might as well bring in the bulldozers and start putting up the condos tomorrow.

Actually, Bob (and by your own words) they are all one generation removed from 1%ers who bought into the Napa Valley lifestyle except for the Trefethens who are two generations removed from the Kaiser Steel CEO grandfather who bought into the valley for a weekend home.

And the point of the article (unintentionally I believe, yet crystal clear nonetheless)is that they are a bunch of ridiculously self-important and pretentious dillettantes who most likely will drive their inheritances into the ground. Look at Will Harlan. He tried to make it on his own. He used his father’s connections to do a tech start up–Equipster–that was a massive, galactic failure. He then ran back to Napa to work for Daddy and make wine under his father’s umbrella.

Like I said, Napa would be much better off if it were much less expensive and able to attract a fresh generation of real talent to move it forward. If the collection of Porsche racers and elite diners in that article are whom the valley is counting on to lead it into the future, you might as well bring in the bulldozers and start putting up the condos tomorrow.

(“Full disclosure”: I attended Santa Clara University’s business school in Silicon Valley. Have worked for tech start-ups in Los Angeles. Part of the “25%-ers” that were a success. And freelanced at a leading ad agency in San Francisco servicing start-ups during the “dot-com” mania. But I never drank the Kool-Aid, and questioned the “business model” of revenue-less and profit-less growth in slavish devotion to achieving “network effects.”